Don’t let manufacturing PMI excite

Among other highlights, new orders rose at the quickest pace since last December, the survey report said, adding, “The rate of expansion was sharp and above its long-run average.” This upturn in new orders was supported by favourable market conditions, demand strength and publicity, according to the respondents.

But one shouldn’t get too excited. “Given the improvements in various PMI sub-components such as new orders, exports and production, from a sentiment stand point, demand seems to be on a better footing,” said Rahul Bajoria, managing director and head, EM Asia (ex-China) economics, Barclays. However, he said it remains to be seen how the actual data (industrial production, core industries growth and exports) pans out since there has been a divergence between PMI survey and actual data, especially on exports.

The International Monetary Fund (IMF) recently pared its global economic growth forecast for this year citing broad-based and sharper-than-expected slowdown amid higher inflation. It also cut India’s growth forecast for FY24. On inflation, manufacturers pointed to higher operating costs due to fuel, metals, transportation, and some other raw materials. It is worth noting here that global oil prices rose in early April following the cut in output by the Organization of the Petroleum Exporting Countries. So, the sub-index measuring input costs rose in April from March; however, the overall rate of inflation stayed below the long-run average, the report said.

There was a modest improvement in selling prices, though. The sub-index measuring output prices hit a three-month high in April, matching its long-run average. Subdued pricing power of manufacturers despite healthy demand has been a source of worry. But there is limited relief with output prices rising at a slower pace than input prices in April. Only 6% of the companies hiked their fees since March while 92% left them unchanged.

“From an inflation perspective, the manufacturing survey indicates modest incremental inflation pressures, but it also shows that core inflation is likely to remain sticky with demand conditions remaining strong,” cautioned Gaura Sen Gupta, economist, IDFC First Bank.

Inflation measured via the consumer price index (CPI) fell to a multi-month low of 5.66% in March aided by lower vegetable prices. The latest reading is a breather as it is below the RBI’s upper tolerance limit of 6%. “We foresee CPI inflation averaging at 5.5% in FY24, so we expect RBI to remain on a pause till December 2023,” Sen Gupta added. Meanwhile, companies are confident that production will rise amid demand resilience, client enquiries, orders pending approvals and marketing efforts.

“Besides seeing the strongest inflow of new work in 2023 so far, capacities were expanded through job creation, input buying was lifted and pre-production inventories rose at a record rate,” said Pollyanna De Lima, economics associate director, S&P Global Market Intelligence. Consequently, PMI’s gauge of business optimism bounced back in April from an eight-month low in March. “While the recovery in the manufacturing sector is likely to continue, we need to watch out for the impact of heatwaves/unseasonal monsoon on overall consumption,” Bajoria added.